Matrix Blog

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Click here for full sized graphic.

Greenspan gives a speech in Hong Kong [NYT] and mentions the r-word (recession) as being a possibility in the US and the following day, after just reaching a record, the Shanghai Composite Index corrected sharply (but its up today) [WSJ].

Notice how Greenspan still carries more weight than Bernanke in terms of an immediate market reaction after a speech?

Combine this phenomenon with the coincidence that Freddie Mac announces more restrictive parameters for subprime lending (sorry, 3rd consecutive day of talking about subprime), durable goods orders shows weakness and all of a sudden, the Dow Jones Industrial Average is falling 400 points, aided by a glitch in computerized trading.

Thats quite a sequence of events for anyone to process. However for perspective, thats a 3.29% drop in the DJIA index, only 4.4% from its record high and yet it still remains above 12,000. I don’t want to sugar coat the drop because it is still a large drop, but on Black Monday, September 19, 1987, the index dropped even more. It fell 508 points but it fell from 2,500 and nearly 23% of value was erased in a single day. Quite a different senario than 3.29%. I remember being in Kansas City visiting friends on that day in 1987 thinking I was out of business. Real estate was over. (Of course I had that same feeling on September 11, 2001).

Warning – statistical aside: Every day, the rise and fall in the DJIA is chronicled in thousands of nightly newscasts. The other day the quote went something like this (I am embelishing here just a little bit):

Stocks slid 5 points as investors grew skittish about the price of rice in China and the growing political clout of left handed orthodontists…

Thats 5 points of a total index of about 12,600 points at that time or a .0004% drop. This is more akin to a rounding error and not an indicator of anything, anymore than an increase of 5 points would be. I think the consumer sees these points as percentage and reads more into subtle changes than they should simply because no perspective is provided. Its like looking at existing home sale trends as a benchmark for a local real estate market. The DJIA is merely a list of major companies that may or may not reflect the overall stock market (sound familiar?).

ok, I am back from the aside.

I was listening to a group of real estate panelists at a luncheon yesterday as the stock market was falling. At the end of the panel, a question came from an audience member that went something like this:

Now that the stock market has fallen moret han 400 points today, what will be the impact on New York City real estate?

The answer given was essentially no affect but the question seems a little dramatic at this point. My mindset is usually oriented to the trend is your friend.

However, it does raise the point that perhaps the conventional wisdom of a continued improvement in the US economy is more tenuous than has been cheered for as of late. In the fall, I was drifting toward the belief that the economy was headed for a recession. My worries have lifted somewhat but I don’t carry the same optomism that the stock markets seem too.

Housing should ultimately provide more of a drag on the economy. I don’t think the impact of the slowdown has had adequate time to fully flow throw the economy. Honestly, its been a challenge to me personally to keep euphoria in check, when commenting on national trends given the better real estate conditions enjoyed in New York as compared to other parts of the country.

What does this stock market drop mean for the real estate economy?

I am not entirely sure. However, if the underlying economy doesn’t change significantly and more people become more risk averse, we may see more movement to saftey like we did yesterday as people move from stocks to treasuries. Treasury prices would go up, and as a result, yields would go down. As yields go, so do mortgage rates, helping temper growing damage caused by foreclosures and limiting the future effects of tightening underwriting guidelines.

All this from a Greenspan speech in Hong Kong. Just imagine if the speech was given at halftime during the Superbowl?

Tags: Getting Graphic, Alan Greenspan, Ben Bernanke, China, Sub-Prime

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A Bloomberg and AP story on London housing prices exemplifies how fascinated we are with rankings when it comes to housing no matter where we live. CBRE compared upper end London housing prices to my most recently completed Manhattan Market Overview in the 2Q and were found to about 20% more expensive (1,200 pounds vs. 1,000 pounds).

While thats interesting, its not the reason for this post.

Look at the extent of the coverage [Google].

As of this morning, the story was picked up by 147 newspapers. Except for markets like Shanghai, Taiwan, Canada, Australia and a few major US markets and national publications, the vast majority of the coverage was in mountain, midwestern or southern states. Most of these markets did not see appreciation rates as high as the US coasts did. These markets include locations such as Alabama, North Dakota, Arkansas, Wyoming, Montana, Nebraska and Wisconsin among others.

Apparently big numbers, either real estate prices or appreciation, still sell newspapers.

Tags: London, Forbes, China, Canadian Housing Market

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On a global scale, modest North American urban growth is in sharp contrast to patterns seen in Asia with China expected to be 50% urbanized (city versus rural) by 2015.

The US coasts are expected to see the largest growth over the next 10 years. That comes as little surprise and consistent with the significantly higher housing appreciation rates seen in the west and the northeast over the past 10 years.

Here is an amazing interactive map [BBC] that shows the global population patterns from 1955 projected through 2015.

However, according to the census bureau, despite the macro trends for urban renewal, including new urbanism, the suburbs are actually flourishing as homeowners look for cheaper housing and better schools. The top five fastest growing cities were suburban (defined as having less than 200,000 in population).

New York remained the nation’s largest city, with 8.1 million people. The city has added 135,000 people since 2000, but it lost 21,500 from 2004 to 2005, more than any other city.

Detroit, with its struggling economy, has lost 65,000 people since 2000, the most of any city. Philadelphia, which has lost about 50,000 manufacturing jobs since 2000, has lost 54,000 people during the same period.

San Francisco, with the highest real estate prices in the country, has lost 37,000 people since 2000, according to the Census Bureau.

Tags: Commerce Dept, Census, China

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It looks like there has been extra butter and syrup applied to the international housing market this year (ok, this was the last pancake reference, I promise). It is amazing how much the housing markets outside the US have seen significant appreciation over the past year.

When considering the impetus for the recent US housing boom and the current slow down, this certainly makes for a strong argument that the cause and effect was not just about the US economy since the US has behaved as much as many other countries has. So perhaps we don’t need to be quite so zeroed in on Bernanke and the Fed and perhaps look toward other factors such as the trade deficit and the weakness of the dollar.

Here’s a sample of recent news links:

• Canada [CBC]

• El Salvador [WaPo]

• India [India Telegraph]

• Australia [National Nine]

• New Zealand [Stuff]

• Norway [Norway Post]

• China [China Daily]

• Pakistan [Daily Times]

• Moscow [Moscow Times]

• UK [Telegraph]

• Ireland [Irish Examiner]

Have I left any countries out that have seen significant growth?

Tags: Canada, Ben Bernanke, China, Canadian Housing Market

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For full sized chart [GasBuddy]

What does higher gas prices mean to the housing market?

Mortgage News daily presented the following points in their commentary: The Effects Of High Gas Prices On The Housing Market [MND]:

• Could revitalize urban areas as the cost of commuting outpaces the higher cost of housing in city centers.
  
• Will place more pressure on city workforce housing issues.
  
• Will cause the Fed to continue to raise the federal funds rate, tempering prices further as mortgage rates rise.
  
• Will increase cost of construction materials and labor. These are already stressed due to the high demand and inadequate supply situation the market is currently experiencing.
  

In the post Who’s afraid of $3 gasoline? [econobrowser] there is the possibility that Americans will be shocked with the discovery that more expensive oil is here to stay and decide that significant changes in lifestyle are immediately called for. If as a result, consumers make sudden changes in plans for spending on such things as cars, durable goods, and vacations, vendors of those products may find themselves left in the lurch. This does not bode well for housing, especially investor and second home markets.

Why $75 Oil Does Not Mean Recession [Rutledge] In Washington today Senator Specter earned his 15 minutes on TV by calling for windfall profits taxes on oil.

That would be the single dumbest thing we could do in a world where oil is scarcer by the day. It would decrease investment in energy and mark one more example of our “capitalism when convenient” school of policy.

But why is the US economy still growing when oil is above $70 per barrel? One reason people cite: it would take $95 oil to be as high as it was in 1981 relative to other prices.

Gas heats Up [Moneyblog] And why won’t reductions in U.S. consumption in oil and gas do much to affect the global price of oil? Because the Indians and the Chinese are just beginning to drive, in their millions.

Its tough to strike a balance in commentary on this issue. The real estate brokerage industry tends to be fairly optomistic about the future, while economists are often writing the market’s epitaph.

Its hard to judge. Coastal markets appear vulnerable while the midwest and southwest are seeing appreciation.

Much of the control of gasoline prices appears to be out of our hands now and OPEC is likely at full capacity, unable to pump out more to ease price increases. We can get it out of the ground but we don’t have enough refining capacity. Conservation efforts won’t have the same impact as it did in the 1970’s because China and India are just getting started on the high consumption track.

Prices are rising at the fuel pump as the weather gets warmer and prices, adjusted for inflation are still well below the price spikes seen in the early 1970’s.

Nevertheless, this week’s obsession with rising fuel prices has reinvigerated concerns over inflation. Inflation means higher interest rates, which means higher mortgage rates, whose impact means many different things in various real estate markets across the country. Clearly, rising gas prices are not good for housing in the long run. The short-term effect will likely vary across the country: ranging from significant price reductions to modest appreciation.

Tags: China

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Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Click here for full graphic [WSJ]

Oil prices are getting many worried, largely because there doesn’t seem to be a limit on their increase these days, with China entering the race for oil consumption and the elimination of the controversial gasoline additive [WSJ] in favor of ethanol, there may be supply and logistical disruptions that send prices higher at the pump. This fuels (sorry) inflation, long term rates rise and/or the Fed continues to press rates upward. Housing suffers.

Tags: Getting Graphic, China

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Shenzhen, China

Via Tropolism via The Boston Real Estate Blog comes the The Top 15 Skylines in the World v3.0 [diserio.com].

I’ll have to recuse myself from voting for NYC and Chicago since I used to live there. I’m going with number 9. Shenzhen, China. Admittedly, night time shots are my favorites.

Click here for the Top 15 Skylines

Tags: China

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In Berson’s Weekly Commentary: Mortgage Debt Outstanding (MDO) growth in 2005 — exactly the same as 2004 [Fannie Mae] he reviews the Fed’s Flow of Funds statistics for 2005 and he found the following:

Warning: Berson’s link lasts one week. For an acrhive of stories including this one go here.

• US households borrowed using home mortgages at the same growth rate in 2005 as they did at 2004.

• Pace of increase slowed in 4th quarter of 2005.

• Growth rate was 14.2% annual, the 4th consecutive year of double-digit growth.

• Home equity grew 15.9% in 2005 and was at highest rate since 1979.

• Debt to value decline slightly from prior year but higher than 10 years ago.

What’s expected for 2006?

• Lower home price appreciation and a lower volume of home sales and refi’s is expected to lower rate of MDO growth.

• Fannie Mae expects a surge in home equity lending.

In other words, property owners are expected to continue to borrow against their properties in significant numbers this year. This makes the direction of mortgage rates a significant barometer for national economic health. Fannie Mae is (obviously) pro-lending, so I would think that lending will (and has) dropped significantly, reflective of the lower number of sales and less attractive refi terms.

Its not clear to me how mortgage origination can sustain nearly double digit growth in 2006. Its not logical, unless mortgage rates fall, which is hard to imagine with the Fed projected to raise short term rates 1-2 more times.

Its unlikely to expect long terms rates to fall in the immediate future, so the best-case scenario for the housing market is to hope for Goldilocks Not too hot, Not too cold [Matrix] and have rates remain where they are.

Fed Chairman Bernanke was quoted today as saying [CNN] essentially that the economy remains strong, despite what is happening to housing which probably means the Fed will continue with belt-tightening 1-2 more times. I think low bond yields (low mortgage rates) are more about our balance of trade with China than anything.

…long-term rates could suggest the level of short-term rates consistent with holding the economy at full employment had declined, perhaps reflecting a lasting drag on the economy from high energy costs, slower growth in house prices and the possibility consumers will begin to save more.

But he also noted long-term rates were low around the globe and said “an explanation less centered on the United States might be required.” One other factor that Bernanke raised, but downplayed, was that large official holdings of U.S. Treasury debt accumulated by countries intervening in currency markets was doing much to push U.S. long-term rates down.

Tags: Ben Bernanke, China

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Daniel Gross wrote a brilliant article (as usual) in this month’s issue of Wired In Praise of Bubbles: Boom and bust cycles have always driven the US economy fostering innovation.

The premise of the article is that people associate them with sob stories, criminal activity and irrational investment behavior.

[Bubbles] tend to follow a painful cycle of boom, bust, hand-wringing, and abject humiliation. But there’s often another step at the end: innovation. Over the past 150 years, many bursting bubbles have paved the way for economic and cultural progress.

methodless enthusiasm was reborn as irrational exuberance

The result of creating too much capacity gives way to other innovations that would have not been possible. One of the exciting aspects of the recent real estate boom has been the redevelopment of urban areas (ie San Diego, New York City, Chicago, Boston. etc.) that would not have been possible during a flat housing period.

Daniel Gross concludes:

“The result has been a real, delayed boom. Put cheap data transmission and storage together with an exploding population of consumers willing to use the Net and you get eBay, Google, and Yahoo! Now come widespread laments that another bursting bubble is anon: real estate, genomics, China stocks, wireless Internet, you name it. Maybe so. But sometimes, a little methodless enthusiasm is precisely what an economy needs.”

Tags: Dan Gross, China

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I have been meaning to post this since last week but I’ve been trying to squeeze in my holiday shopping…

Daniel Gross, in his excellent MoneyBlog observes that the Chinese economy grew 15% overnight

This is particularly disturbing since we are looking long and hard at Chinese GDP and wondering what affect the Chinese economy is going to have on mortgage rates in the US next year.

In Richard McGregor’s article China to up GDP estimate by 20% [FT]:

“The revision is set to restate the size of its economy, in effect adding on the equivalent of Turkey and gaining the rank of the world’s fourth-largest economy.”

And here’s an amazing statement:

Zhou Xiaochuan, governor of the central bank, said this week: “The figures we used in the past have all been changed.”

Can you imagine if Greenspan or Bernanke had done this? Bedlam would ensue in the financial markets.

Tags: Dan Gross, Alan Greenspan, Ben Bernanke, China

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William H. Gross of PIMCO writes about the cycle of real estate and our danger of slipping into a recession [PIMCO]:

• Housing prices will cool/stop going up very much/even go down in some cities, WHEN…

  a. Interest rates rise to a high enough level to make the purchase of a new home a burden instead of a boon for first time buyers.
  b. Mild regulatory pressure begins to reduce the amount of funny-money lending.
  c. Speculators sniff the beginning of the end.
  

• Home equitization should retreat shortly thereafter.

• Consumption/the U.S. economy will then weaken when the house ATM starts running out of fresh new $25,000/$50,000/$100,000 home equity loan dollar bills.
• The Fed will cut interest rates in order to start the game all over again.

The factors affecting the US Economy’s fate are:

• oil/natural gas prices [Slate]
• China’s economic growth
• foreign willingness to buy our Treasury bonds

He concludes that the froth in the housing market is leaving and higher mortgage rates will make a recession nearly inevitable, possibly requiring the Fed to lower short term rates in mid-2006.

The result? Housing appreciation slows to single digits next year, thereby having a soft landing.

Tags: China

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Chinese Real Estate Market Update

The housing boom in China has been characterized by singificant price growth this year. Housing prices in Beijing grew 20% in first 8 months of the year [People’s Daily]. Government forecasts are for more of the same for the remainder of the year [People’s Daily].

Developer’s have been more creative in their marketing, or as an official Chinese Newspaper describes it as “concocting” westernized names for their developments but some have been pressured [People’s Daily] to drop their names and appeal more to local culture.

Shanghai is still the hottest real estate market in China. Prices of “second-hand” housing grew faster than new housing [People’s Daily].

Tags: China

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